𝗧𝗮𝘅𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝗘𝗦𝗢𝗣𝘀 𝗶𝗻 𝗦𝘁𝗮𝗿𝘁𝘂𝗽𝘀 – 𝗣𝗲𝗿𝗾𝘂𝗶𝘀𝗶𝘁𝗲𝘀, 𝗗𝗲𝗳𝗲𝗿𝗿𝗮𝗹𝘀 & 𝗗𝗲𝗱𝘂𝗰𝘁𝗶𝗼𝗻s
ESOPs for eligible Indian startups are taxed at two stages for employees: as a perquisite on exercise and as capital gains on sale. The taxation for eligible startups is unique because the tax payment on the perquisite can be deferred for up to five years, providing significant cash flow relief.
Perquisite tax on ESOPs
A taxable perquisite is triggered when an employee exercises their stock options, not when the options are granted or vested.
𝗖𝗼𝗻𝗰𝗲𝗽𝘁 & 𝗣𝘂𝗿𝗽𝗼𝘀𝗲:
✅ESOPs let employees own company shares over time, often used by startups to retain talent when cash salaries are limited.
𝗧𝗮𝘅 𝗧𝗿𝗶𝗴𝗴𝗲𝗿 𝗣𝗼𝗶𝗻𝘁𝘀:
✅ESOPs are taxed twice — first as a perquisite (at exercise/allotment) and later under capital gains when shares are sold.
𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗥𝘂𝗹𝗲:
✅The perquisite value equals the fair market value (FMV) on the exercise date minus the price paid by the employee.
𝗧𝗗𝗦 𝗢𝗯𝗹𝗶𝗴𝗮𝘁𝗶𝗼𝗻:
✅Employers must deduct TDS under Section 192 on the perquisite value in the year of allotment, unless deferral applies to eligible startups.
𝗗𝗲𝗳𝗲𝗿𝗿𝗮𝗹 𝗕𝗲𝗻𝗲𝗳𝗶𝘁 𝗳𝗼𝗿 𝗦𝘁𝗮𝗿𝘁𝘂𝗽𝘀:
✅Under Section 80-IAC, eligible startups and their employees can defer tax payment up to the earlier of —
✅(i) 48 months after allotment year,
✅(ii) employee exit, or
✅(iii) sale of shares.
𝗥𝗲𝘁𝘂𝗿𝗻 𝗗𝗶𝘀𝗰𝗹𝗼𝘀𝘂𝗿𝗲:
✅Employees must still disclose ESOP perquisite value in the year of allotment, though payment of tax is postponed.
𝗘𝗺𝗽𝗹𝗼𝘆𝗲𝗿 𝗗𝗲𝗱𝘂𝗰𝘁𝗶𝗼𝗻:
✅While ESOP cost is booked as employee compensation, its tax deductibility can be disputed. Courts have often allowed it where linked to remuneration.
𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 𝗔𝗱𝘃𝗮𝗻𝘁𝗮𝗴𝗲:
✅The deferral provision ensures employees don’t pay tax upfront on notional gains, improving liquidity and supporting startup growth.
Team- Intellex Strategic Consulting Private Limited
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